The chimera of a Digital El Dorado.

According to the latest reports playing uP the riches of the digital television era, by the year 2005 European revenues from digital technology will reach $40 billion. Compare this with the $9.75 billion in U.S. digital revenues anticipated by 2002.

The European report, put out by Baskerville Communications, predicts that, by 2005, 71 million European households will subscribe to digital TV services. The American report on DBS and DTH comes from Frost & Sullivan. In effect, according to Baskerville, 53 percent of European TV households would be spending an average of $557 per year just for digital TV received via cable or satellite, excluding hardware costs. Currently, the 14.5 million European pay-TV subscribers (CIT Research figure) spend an average of $323 per year (Screen Digest figure). Adjusted for inflation, the Baskerville estimate represents roughly $480 per year in 1997 dollars. The cost of the receiving hardware and installation for digital TV will most likely be close to the average 1997 cost of $1,300, since inflation will be balanced by volume and lower production costs. If digital TV operators like BSkyB eventually offer decoders at $450, the operators will have to subsidize them (analysis by The European). On top of all this, by the year 2005, the estimated 71 million European digital TV households are expected to rent or buy $187 worth of videotapes and/or DVDs per year (compare this with the $239 per year the average U.S. TV household currently spends on home video(*)), pay a public TV annual fee of at least $120 and spend another $73 per year going to the movies.

It is therefore something of an understatement to say that, according to such predictions, it's going to be expensive for future Europeans to entertain themselves. Adjusting everything for inflation, it would be like a family today spending $2,000 in one year to have fun with filmed entertainment.

Today the average U.S. digital satellite subscriber earns $50,000 per year. If the same is true for Europe, digital television would be taking 4 percent of the earnings of this high-income category.

A Zenith Media report estimated that by 1999 European TV advertising expenditures will reach $31 billion annually. In Europe pay-TV services currently generate $4.8 billion a year, home video generates $9.5 billion, cinema brings in $3.5 billion and commercial TV stations take in $20 billion, for a total of $37.8 billion. Of these revenues, $11 billion goes to American companies in exchange for program rights. Combining Baskerville's estimate of $40 billion by 2005 just for digital pay services with the estimated revenues from TV, home video and cinema, the filmed entertainment figure for 2005 would be $87 billion.

Most likely, filmed entertainment expenditures will be more on the order of $300 per year for the average TV household, of which $90 per year will go tO digital pay services (currently, the average household spends only $38 per year on pay-TV services). This would mean that the European market for filmed entertainment would garner $60 billion annually by 2005. This figure is in line with a report from CIT Research estimating that, by 2004, European pay-TV penetration will rise to nearly 19 percent of total TV homes, thus reaching 33 million TV households and becoming, we estimate, a $12 billion business.

Of course, all this assumes that there won't be a major recession - a recession might lead politicians to clamor for the return of prized digital pay-TV events (like soccer) to free television.

Baskerville also forecasts that Germany will have more than 30 million homes with access to digital services by 2005 and will "provide the lion's share of digital revenues, with a staggering $17.8 billion in 2005." Considering the fact that Germany currently has a total of 31.9 million TV homes and will have an estimated 33.5 million by 2005, Baskerville's prediction means that nearly 90 percent of German TV households would be subscribing to digital TV. This seems unlikely.

The area surveyed by Baskerville - France, Germany, Italy, Spain, the U.K., Denmark, Finland, the Netherlands, Norway and northern Belgium and Sweden - has a total of 127 million TV households and will have an estimated 133 million by 2005; therefore, according to the Baskerville report, in eight years more than 53 percent of European households will have digital TV service.

Compare this with the recent growth of U.S. digital TV (mainly via DBS), which Wall Street expects to "eventually" reach 15 percent of the current 100 million TV households.

The Baskerville forecast states that, in Europe, "digital households will rise from 495,000 at the end of 1996 to 15.5 million at the end of 1998." This represents a growth of 3,000 percent.

Baskerville also estimates that, by 2005, the European digital households will consist of 22 million dish homes and 49 million cable homes. The analyzed area currently registers 33 million cable homes and 14 million dish homes (Baskerville figures). The expected growth, therefore, is 33 percent for cable and more than 42 percent for satellite.

Of course, this assumes that European cable operators will invest the required $144 billion (ECN estimate) in upgrading their systems to digital. Baskerville estimates that digital TV will take off by 1998 and that the aggregate seven-year revenues will reach an estimated $190 billion, of which $130 billion is expected to go to cable. Using the current revenue split of BSkyB (18 percent of their billings go to cable and 30 percent to program producers), digital cable operators would be keeping at most $90 billion, barely enough to recoup upgrade investments. And this doesn't include marketing costs and costs of money.

SOURCES AND TELEPHONE NUMBERS

Baskerville Communications (44 171) 437 0493

CIT Research (44 171) 486 3500

ECN (44 1372) 842 293

Emc3 [phone]

Frost & Sullivan [phone]

Screen Digest (44 171) 580 2842

Zenith Media (44 171) 255 1221

* The global video rental and sell-through business is currently estimated at $35 billion a year (Emc3 figure). Of that, American producers' share in 1995 was $15 billion.